In the pursuit of KLCI fair value


  • Business
  • Monday, 12 Jul 2004

BY LAI MUN CHOW

SINCE the fourth quarter of 2003, many analysts have been very bullish about the prospect of the Malaysian economy. As a rosy economy would translate into better corporate earnings, it is unsurprising that both local and international investors have been increasingly upbeat in the equity market.  

The Kuala Lumpur Composite Index (KLCI), which has spiralled up by about 30% over the past 12 months, is the best testament to it.  

The price-to-earnings ratio (PER) of the Bursa Malaysia is widely estimated to be 16 in 2004. It is higher than that of the stock exchanges of South Korea, Indonesia, Thailand and the Philippines, with PERs of 10, 11, 12 and 14, respectively.  

Nevertheless, it compares favourably with China, Singapore and Taiwan, the PERs of which are forecast to be 23, 17 and 18, respectively. Indirectly, this suggests that investors are willing to buy shares on the Bursa Malaysia at a premium. 

While the bulls predict that the KLCI could rally close to 1,000 points in the near future, the bears feel that the KLCI is due to consolidate now. From the perspective of a value-investing approach, a continuous surge in the KLCI would suggest that there are still many undervalued stocks in the market.  

In contrast, if there were too many overvalued stocks, there would be a strong resistance for the KLCI to move up further over the short-term. Meanwhile, the prevailing KLCI of about 800 points should be deemed a fair value, if most of the stocks in the market have already been reasonably priced. 

In the case of Malaysia, stocks that trade below a price-to-net tangible asset (NTA) ratio of 1 and not more than a PER of 16 are generally considered as undervalued. More importantly, the companies’ profitability also matters.  

Given that thinly traded stocks can be due to a lack of market interest, an undervalued stock is unlikely to have a market capitalisation of less than RM500mil. This is important, for liquid stocks allow investors to enter and exit from them without moving the prices sharply. 

There are now over 950 stocks listed on the Bursa Malaysia. While it is not practical to analyse all of them, it is possible to obtain a fairly clear picture by focusing on just the 100 KLCI-linked stocks. After all, the movement of the KLCI is completely dependent on them. 

There are 12 KLCI-linked stocks in the Consumer category. Only one of them has a market capitalisation of less than RM500mil. While they are all profitable, only six of them trade below a PER of 16. It is worth noting that five of them have no more than a price-to-NTA ratio of 1. The stocks that fall into this category are generally not expensive and it seems that they have yet to unleash their full potential.  

In the Industrial category, there are 15 KLCI-linked stocks. Four of them have a market capitalisation of less than RM500mil each. There are only two companies that are not profitable. While seven of the stocks trade below a PER ratio of 16, there are only four stocks that trade below a price-to-NTA ratio of 1. On the whole, the stocks appear to have just a small upside potential in the near term.  

There are only four stocks in the Construction category that are KLCI-linked. All of them have a market capitalisation of more than RM500mil each. They are not only profitable, but also trade below a PER of 16. Nevertheless, none of them trades below a price-to-NTA ratio of 1. This probably indicates that there is still some upside potential for the share prices.  

In the Trading and Services category, there are 32 KLCI-linked stocks. Of these, only one has a market capitalisation of less than RM500mil. Meanwhile, there are four loss-making companies. Importantly, there are 13 stocks that trade below a PER of 16. Nevertheless, there are only five stocks that trade below a price-to-NTA ratio of 1. This suggests that the share prices are close to their peak levels.  

All the thirteen KLCI-linked stocks in the Finance category not only have a market capitalisation of more than RM500mil each, but they are also highly profitable. However, only three of them trade below a price-to-NTA ratio of 1. Meanwhile, six of them trade below a PER of 16. This indirectly indicates that the potential for upsurge in the share prices would not be great.  

In the Technology category, there are five KLCI-linked stocks. Two of them have a market capitalisation of less than RM500mil each. Interestingly, Globetronics is the only stock that trades below a price-to-NTA ratio of 1. Meanwhile, the only stock that trades below a PER of 16 is Mesiniaga.  

It does not come as a surprise, for overall technology stocks have been trading at a relatively high PER over the years. Thanks to the rapid recovery of the global semiconductor industry since the fourth quarter of last year, all the companies have become profitable now.  

Altogether, there are nine KLCI-linked stocks in the Properties category. Four of them have a market capitalisation of less than RM500mil each. Only two of them trade below a PER of 16. Nevertheless, it is worth noting that there are eight stocks that trade below a price-to-NTA ratio of 1. More importantly, there are only two loss-making companies in this category. It will not therefore be surprising, if share prices were to nudge up further over the short and medium terms.  

Finally, in the Plantation category, there are six KLCI-linked stocks and all of them are profitable companies. Except for one, none of them has a market capitalisation of less than RM500mil. Importantly, all the stocks trade below a PER of 16 and half of them trade below a price-to-NTA ratio of 1. All these augur well for the share prices to keep rising over the short and medium terms.  

Going forward, it seems that there will still be some upside potential for the KLCI towards the end of this year. After all, the economic fundamentals of Malaysia remain strong and resilient.  

As long as crude oil prices do not surge further and the predicted hard landing in China’s economy does not materialise, the Malaysian economy is likely to grow remarkably this year. Arguably, the next rally might not be broad based, with only undervalued stocks perking up impressively. 

  • The writer is a Senior Research Officer with the Malaysian Institute of Economic Research 

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